The existing Transparency Directive (2004/109/EC) requires issuers of securities traded on regulated markets within the EU to ensure appropriate transparency through a regular flow of information to the markets. This information consists of:

(i) yearly, half-yearly and quarterly financial information;

(ii) on-going information on major holdings of voting rights and

(iii) ad hoc information disclosed pursuant to the Market Abuse Directive (for example: inside information has to be made public as soon as possible to the market under the conditions of the Transparency Directive).

What is the main objective of the modification of the existing Transparency Directive?

1. The existing Directive foresees a number of notification thresholds for acquirers when they reach a certain stake in a listed company. However, the existing rules contain a notification gap: holdings of certain types of financial instruments that can be used to acquire economic interest in listed companies without acquiring shares are not currently covered by the Directive’s rules for disclosure. This was much less of an issue in 2004 when the existing Directive was adopted. But it can eventually lead to secret stake-building in listed companies with a view to acquiring significant influence which in turn can give rise to possible market abuse situations, low levels of investor confidence and the misalignment of investor intentions with long-term interests of companies.

2. In addition, some of the current transparency requirements result in a disproportionate administrative burden: the requirement to publish quarterly financial information contributes, in particular for small and medium-sized issuers, to the high costs of compliance linked to listing on the regulated markets. This requirement is also perceived as a regulatory incentive encouraging the culture of short-termism on financial markets.

What are the main modifications made in the revised Transparency Directive?

1. In order to close the existing gap in the notification requirements, the revised Transparency Directive requires disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies and has the same effect as holdings of equity.

The revised Directive will also provide for more harmonisation concerning the rules of notification of major holdings in particular by requiring aggregation of holdings of financial instruments with holdings of shares for the purpose of calculation of the thresholds that trigger the notification requirement.

2. In order to reduce the administrative burden and to encourage long term investment, the requirement to publish quarterly financial information is abolished. The home Member State may only under specific conditions require issuers to publish additional periodic financial information on a more frequent basis than the annual or half-yearly reports required by the Directive, namely if, after an assessment of the impacts, it is shown that such additional requirement does not lead to an excessive focus on short-term results and performance of the issuers and to a negative impact on the access of small and medium sized issuers to regulated markets. Companies could of course also decide to publish quarterly information on a voluntary basis if they wished to.

Does suppressing the requirement to publish quarterly financial information reduce the transparency in the market and damage investors?

A thorough impact assessment was carried out before the Commission proposed to abolish this requirement. Its results show that quarterly financial information is not necessary for investors' protection even if it can provide useful information for some investors. Investor protection is already sufficiently guaranteed through the mandatory disclosure of half-yearly and yearly financial results, as well as through the disclosures required by the Market Abuse Directive.

In addition, quarterly financial information as currently required by the Transparency Directive is not prepared according to the accounting standards and therefore this information might not offer adequate quality nor give sufficient assurance to investors.

What is the objective of the proposed country by country reporting requirement in the Transparency Directive?

The revised Accounting Directives (78/660/EECand 83/349/EEC) introduce a new obligation for large extractive and logging companies to report the payments they make to governments (the so-called country by country reporting-CBCR). Reporting will also be carried out on a project basis, where payments have been attributed to specific projects. The Accounting Directives regulate the information provided in the financial statements of all limited liability companies which are registered in the European Economic Area (EEA).

In order to ensure a level playing field between companies, the same country by country requirement has been incorporated in the revised Transparency Directive. This has the consequences that all companies which are listed on EU regulated markets are covered even if they are not registered in the EEA and incorporated in a third country.

See also MEMO/13/541 for specific information on country by country reporting.

What is the new definition of financial instruments covered by the disclosure requirements?

In order to close the existing gap in the notification requirements, the revised Transparency Directive requires disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies and have the same effect as holdings of equity.

The definition of financial instrument is broadened to all instruments of similar economic effect to holdings of shares and entitlements to acquire shares, whether giving right to a physical settlement or not. It covers cash-settled derivatives (a derivative contract where one party holds a long position and the other party holds a short position in a particular stock, with any nominal value difference at maturity settled in cash) as well as similar financial instruments not yet available on the markets but which could be the result of financial innovation.

The new definition focuses on the economic effect of a financial instrument rather than enumerating the types of financial instruments covered. The general principle of notification of all instruments of similar economic effect to holdings of shares and entitlements to acquire shares is subject to exemptions in order to avoid providing the market with irrelevant information and spare notification costs for market players which by definition should not exercise any influence on voting policies or acquire a secret stock in the underlying company.

The holdings of financial instruments with similar economic effect to holdings of shares and entitlements to acquire these that provide exclusively for a cash-settlement, shall be calculated on a ‘delta-adjusted’ basis. ESMA shall develop draft regulatory standards to specify the methods of determination of delta for this purpose that it shall submit to the Commission for adoption.

What are the new rules for aggregation of holdings of shares with holdings of financial instruments?

In order to provide a sufficient level of transparency with regard to major holdings, holdings of financial instruments will be aggregated with holdings of shares for the purpose of calculation of the thresholds that trigger the notification requirement.

However, to avoid any confusion as to the nature of holdings, the holder of shares and financial instruments has to specify separately the amount of holdings of shares and the amount of holdings of financial instruments in its notification.

Does the Directive provide for maximum harmonisation of the thresholds for notification of major holdings?

Taking into account the differences of ownership structures in listed companies in different Member States, it did not appear appropriate to harmonise the thresholds for notification of major holdings and to prohibit Member States from setting lower thresholds for notification in the proposal. Consequently, Member States with dispersed ownership of listed companies continue to be able to set the lower thresholds than those provided for in the Transparency Directive.

What changes are made to the access to and storage of regulated information?

The existing Transparency Directive requires each Member State to establish a storage mechanism to ensure access of the public to regulated information. However, access to such information on a pan-European basis is currently complicated: interested parties need to go through 27 different national databases which are not sufficiently interconnected. The lack of a centralised storage system is thus a major barrier to the functional integration of European securities markets, and the creation of an effective pan-European marketplace for capital. It can also be a barrier for cross border visibility of small listed companies.

For this reason, the revised Transparency Directive provides that a European electronic access point to regulated information will be developed and operated by ESMA. Member States shall ensure the access to their central storage mechanisms via the access point. The European Commission receives further delegated powers in this respect to facilitate access and search to regulated information at the Union level. ESMA would assist the European Commission by developing draft regulatory technical standards concerning, for example, the technical requirements for the operation of the central access point for regulated information and the technical requirements regarding communication technologies used by national storage mechanisms.

10. How will the Transparency Directive facilitate accessibility, analysis and comparability of reports published under the Transparency Directive?

A harmonised electronic format for reporting would be very beneficial for issuers, investors and competent authorities, since it would make reporting easier and facilitate accessibility, analysis and comparability of reports. For this reason the preparation of annual financial reports in a single electronic reporting format will be mandatory as from 1 January 2020. ESMA has been tasked to develop draft regulatory standards for adoption by the Commission, to specify the electronic reporting format, with due reference to current and future technological options, such as eXtensible Business Reporting Language (XBRL). When preparing the draft regulatory technical standards, ESMA should conduct open public consultations for all stakeholders concerned, make a thorough assessment of the potential impacts of the adoption of the different technological options, and conduct appropriate tests in Member States on which it should report to the Commission when it submits the draft regulatory technical standards.

11. What sanctions will be applied for breaches of the requirements of the Transparency Directive?

Member States will be required to provide that appropriate administrative sanctions and measures could be applied if violations of the Transparency Directive are identified. The lack of sufficient sanctions had been identified as one big weakness in the wake of the financial crisis in 2008. The agreed rules are to a large extent similar to those in the recently agreed Capital Requirements Directive IV (MEMO/13/272). The European Commission also presented a communication on sanctions in December 2010 (see IP/10/1678).

The revised Transparency Directive requires Member States to adopt common minimum standards on:

types and addressees of sanctions;

the level of fines;

the criteria to be taken into account by competent authorities when applying sanctions;

the publication of sanctions.

12. Who will benefit from the revised Transparency directive and how?

Issuers and in particular small and medium-sized issuers will see their administrative burden reduced. A regulatory environment that is more favourable to securing long-term support for issuers would be encouraged.

The regulatory environment would correspond better to the needs of today's markets and investors. Investors would be better informed about ownership of listed companies.

Civil society would benefit from increased transparency and could hold government accountable to the revenues received from companies for exploiting natural resources.